Panama Canal drought impacts shipping and sale contracts

The Panama Canal significantly reduces the time and distance for vessels to travel between the Atlantic and Pacific oceans. It normally operates all year round, 24 hours a day and statistics show that about 13,000 to 14,000 vessels cross the Canal annually.

However, the region has recently been suffering from its worst drought for over 70 years. As a result, and for the first time ever, the Panama Canal Authority has had to limit the number of vessels crossing the Canal. The usual average is about 36. This was reduced to about 32 in June 2023 and, as of 3 November 2023, the number is down to only 25. Additionally, it is expected that this number will be gradually reduced to 18 slots a day from February 2024. Therefore, the situation is not going to improve any time soon. The Authority has also had to reduce the draft limit from 50ft to 44ft.

Consequently, vessels are having to wait much longer than normal before they can pass through the Canal, with the resulting delays filtering through and potentially impacting the whole supply chain both in terms of delays and increased costs.  

The delays are pushing shipping rates upwards in other regions, with fewer vessels being available for longer routes. Nonetheless, some shipping companies are opting to avoid the delays by taking those longer routes around the Cape of Good Hope, Cape Horn and the Suez Canal. Or they are spreading cargoes across multiple vessels in order to meet reduced draft limits.

Whilst vessels without pre-booked slots to cross the Canal are being turned away, some parties are looking to bid for expedited transit slots with booking slots reportedly being auctioned at record prices – one booking slot was reportedly auctioned for US$3.95 million for an LPG carrier scheduled to make a northbound transit from the Pacific to the Atlantic on 15 November 2023.

Those whose charterparties, contracts of affreighment and/or sales contracts are impacted, or who are currently negotiating future contracts that may be impacted, are recommended to carefully consider what this situation means for them and their counterparties and how it may be provided for within their associated contracts.

In this regard, it is important to identify the allocation of risk under the contract for any delays and associated costs. Shipping clauses dealing with delay, detention of the vessel and demurrage should be reviewed carefully, as should any force majeure, Stoppage of Canals and Waterways clauses or similar.

Whilst the scope and effect of these clauses will depend on the law governing the contract, from an English law perspective, it is unlikely the English law concept of frustration will be available as it is usually necessary to demonstrate performance of the contract has become impossible, which is different to a situation where performance can take place, albeit that performance is delayed or becomes much more expensive.

In terms of sales contracts, some considerations include: who is responsible for additional costs associated with the carriage; whether these costs can be passed up or down the contractual chain; what the demurrage provisions says; and whether time is of the essence in delivering the goods.

If necessary, it is recommended that affected parties seek legal advice with regard to their rights and responsibilities under their contracts, both existing and future.

Hill Dickinson have been advising clients on various contractual and commercial issues arising as a result of the Panama Canal drought. If you have any queries, please contact Colin Lavelle, Beth Bradley or your usual contact at Hill Dickinson.